Mattel Shares Put in Time Out After Earnings Announcement
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Mattel (NASDAQ: MAT) shares were smashed by nearly 8% this morning following news of the corporation’s Q1 2012 financial results. Following the somewhat disappointing domestic holiday sales season, the toy maker reported $928.4 million in revenue in the first quarter of 2012, down 2.5% from the comparable quarter last year. Likewise, driven by the acquisition of HIT Entertainment – the owner of the Thomas & Friends, Barney, and Bob the Builder brands – earnings of two cents per share this quarter were down 53% from Q1 2011 earnings.
The sluggish performance was not solely attributable to the acquisition costs, which accounted for a four cent per share hit to earnings, but a worrisome decrease in demand among Mattel’s core Barbie and Hot Wheels brands also hindered post-holiday progress. Despite rising commodity and labor costs, gross margins did rise nearly 200 basis points to 51%, alleviating some of the financial shortcomings.
Barbie and Hot Wheels, which are among Mattel’s many toy brands but serve as the core of the overall portfolio, were down 4% and 6%, respectively, for the quarter. The two core brands’ sales have slouched over the past five quarters, being relatively flat in the domestic market, and although they have grown in the international space, sales have largely been boosted by currency gains.
It is a disturbingly unfortunate time in the toy market to face portfolio relevancy issues, as the competition is becoming increasingly intense. Competitor Hasbro (NASDAQ: HAS), which is known for its wide board game portfolio, has recently teamed with online game developer Zynga (NASDAQ: ZNGA) to bring virtual games like FarmVille, CityVille, and Mafia Wars to the physical world. Likewise, Demark-based Lego Group, which has increasingly become a rebranding powerhouse, continues to offer super exciting alternatives to Mattel’s seemingly dated core brands. Pairing with the Star Wars, DC Comics, Pirates of the Caribbean, Toy Story, and Harry Potter franchises, Lego has continued to make huge splashes into the physical toy (figurines), the video game, and the DVD/Blu-ray realms.
Mattel is not without several tricks up its sleeve, however. Despite the recent HIT acquisition, which simply acted to bring more brands into Mattel’s product portfolio, the toy maker is increasingly exploring more avenues in which it can extend its individual brands. The corporation’s recent 2012 toy portfolio plan announcement gives some further insight as to what Mattel is doing to boost its sagging sales.
- Tablet Apps: The lines between the toy and technology worlds continue to blur, and Mattel’s Apptivity program shows the result of the mash-up. Apptivity allows owners of tablets like the Apple (NASDAQ: AAPL) iPad to infuse the play with physical toys like Hot Wheels model cars with interactive digital applications. Cars placed on the tablet’s surface, for instance, will allow players to “race” through digital tracks. Mattel has plans of expanding its Apptivity program to include other brands like Barbie, WWE, Angry Birds, Cut the Rope, and Fruit Ninja later in 2012.
- Digital Imaging: With more than 80% of U.S. households owning digital cameras, nearly 35% owning smartphones, and even more having possession of a more simple camera phone, the world of digital photography is becoming increasingly ubiquitous. Mattel’s new Barbie Photo Fashion Doll allows children to take pictures with any of these devices and display them on the doll’s digital screen-laden t-shirt for further customization as compared to a traditional Barbie doll.
- DVR: Mattel has unveiled the Kids Tough Portable DVR to allow children to take their favorite content on the go. Connecting directly to their TV, favorite programs can be recorded to the DVR for use on road trips and plane rides.
Through the use of such technologies, the toy market is becoming comically similar to the consumer technology market for older teens and adults. Consumers of all ages are continually demanding for seamless integration of their content on all of their devices – the use of digital music, books, videos, and applications is no longer “optimal” on only a PC. Whether or not the aforementioned Mattel projects will be successful or not, the corporation is making the bet that children are facing the same demand shifts. This consumer group also desires to not only have their favorite brands in the physical world (dolls/figurines), but would also like to have them available through other mediums.
If any toy brand can pull off such a successful integration of mediums, it should be Mattel, as its portfolio contains some of the longest-living and generation-transcending brands in the toy realm. Barbie recently celebrated her 53rd birthday, and Matchbox and Hot Wheels toys were first produced in 1953 and 1968, respectively. Their continued popularity hint that the brands, despite the recent slow down in their demand, can be revamped with new generations of tablet, digital camera, and Internet-using kid consumers. Perhaps play time will resume at Mattel once again, and investors should hope that the turnaround comes sooner than later – even with the 8% drop from the recent announcement, the corporation is by no means a glaring bargain (13x 2012’s earnings vs. Hasbro trading at 11.7x 2012’s earnings), and the highly fragmented industry in which it operates will not present a more favorable competitive landscape any time in the near future.
Motley Fool newsletter services recommend Apple, Hasbro and Mattel. The Motley Fool owns shares of Apple and Mattel. gibbstom13 has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.